Charge Enterprises (NASDAQ:CRGE) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Charge Enterprises, Inc. (NASDAQ:CRGE) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Charge Enterprises

How Much Debt Does Charge Enterprises Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Charge Enterprises had US$25.0m of debt, an increase on US$17.2m, over one year. But on the other hand it also has US$66.0m in cash, leading to a US$41.0m net cash position.

How Healthy Is Charge Enterprises' Balance Sheet?

We can see from the most recent balance sheet that Charge Enterprises had liabilities of US$157.9m falling due within a year, and liabilities of US$24.9m due beyond that. Offsetting these obligations, it had cash of US$66.0m as well as receivables valued at US$83.3m due within 12 months. So its liabilities total US$33.4m more than the combination of its cash and short-term receivables.

Given Charge Enterprises has a market capitalization of US$684.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Charge Enterprises also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Charge Enterprises's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Charge Enterprises wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to US$580m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Charge Enterprises?

Although Charge Enterprises had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$11m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Charge Enterprises is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Charge Enterprises you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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